Section 2. Economy
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Part II Chapter 1 Section 2. Economy Section 2. Economy Nobuo HIROHATA 1. Economy of Cambodia other donors. And from then on, Cambodia’s currency system became highly affected by the U.S. currency. 1-1 Transition to market economy In Cambodia, a full-scale transition of a centrally planned economy to a market economy started after Cambodia’s civil war came to an end when the Paris August 1994 when the Law on Investment was promul- Peace Accord was signed in October 1991. Elections gated, with which the Royal Government intended to were held in May 1993 under the auspices of the United induce foreign companies to invest in Cambodia. For- Nations Transitional Authority in Cambodia eign companies, as a result, increased investments in (UNCTAD), after which Cambodia seemed to enjoy garment manufacturing and such industries that were relative political stability. After the election, the Con- labor-intensive. Major investors at this time were over- stitution of the Kingdom of Cambodia was promulgated seas Chinese living in Taiwan, Hong Kong and other in September 1993, according to the statement of which ASEAN countries that saw a comparative advantage in Cambodia proceeded with economic institutional Cambodia’s low land prices and low labor costs. Espe- changeover from a centrally planned economy to a mar- cially after 1997 when Cambodia obtained the most fa- ket economy. vored nation (MFN) status from the United States and, Manufacturing in Cambodia in the past was con- thus, obtained the General System of Preference for its ducted mostly on a very small-scale, informal basis export products, Cambodia’s garment export to the where food processing, brick making and timber pro- States leapt high, which contributed to its high eco- cessing played leading roles. Cambodia, nevertheless, nomic growth. went through a great deal of structural changes in the Cambodia’s economic development came to a tempo- past decade or so after declaring a market economy. rary halt in July 1997 when both internal and external The following is an outline, as seen in a historical order, factors hit the economy hard. Political uncertainties and of the changes in Cambodia’s economic structures. the Asian Financial Crisis daunted the country. This (i) Starting from 1993 on: A changeover from a cen- was the period when international aid agencies tempo- trally planned economy to a market economy. rarily suspended their aid programs, private companies (ii) After 1994: The economy became highly depen- slacked off their production and sales activities, and for- dent on the external assistance provided by inter- eign investors refrained from committing new invest- national aid agencies. ments. (iii) After 1995: The economy showed steep growth After 1999, Cambodia’s economy regained its stabil- led by labor-intensive industries, especially gar- ity and now is showing healthy growth. And it seems ment manufacturing. obvious that membership in ASEAN (in April 1999) and (iv) After 1997: The economy was daunted by political the ASEAN Free Trade Area (AFTA) have integrated unrest and the fallout from the Asian financial cri- Cambodia’s economy globally and regionally. In order sis. to strengthen the regulatory framework for business or- (v) After 1999: Integration into the regional economy ganizations in a free market, the Royal Government of by seeking membership in various economic asso- Cambodia enacted the Law bearing upon commercial ciations such as the ASEAN. regulations and the commercial register and the Law of At the time of the initial attempt of a changeover chamber of commerce as well as prepared the economic from a centrally planned economy to a market economy, plans. Along the same lines, the Royal Government foreign residents who came to Cambodia taking part in also aims to privatize the existing state owned enter- such missions as the UNCTAD generated the demand prises (SOEs) by means of disposal, either by sales or for the everyday commodities. After that, Cambodia’s lease. economy became heavily dependent on external assis- tance that it received from international aid agencies and 45 Country Study for Japan’s ODA to the Kingdom of Cambodia Table 2-1 Cambodia’s Main Macro-economic Indicators 1994 1995 1996 1997 1998 1999 Real GNP growth rates (%) 5.7 7.6 7.0 1.0 1.0 4.3 GDP (billion riels) 6,131 7,200 8,250 9,100 10,900 11,960 GDP (US$ millions) 2,387 2,924 3,124 3,033 2,868 3,132 GDP p.c. (US dollars) 241 284 292 276 252 268 Consumer price inflation rates (%) - 9.1 7.1 9.2 18.6 5.2 Exchange rate (riels per dollar) 2,569 2,462 2,644 3,000 3,800 3,819 Source: Ministry of Economy and Finance (2000) 1-2 The present state of the economy induced by the impact of such factors as external assis- tance and foreign direct investment. Some of the fea- After Cambodia began its attempt for a changeover to tures that shape Cambodia’s unique economic structures a market economy, there was relatively high economic are as follows: growth in which real GDP growth rates reached 5.7%, (i) Two-tier system, where both traditional and mod- 7.6% and 7.0% in 1994, 1995 and 1996 respectively. ern ways of industry exist hand in hand Several factors contributed to this economic success (ii) Agricultural products with comparative advantage; such as i) a rapid increase, in 1995, in rice production, Angkor temple complex as an asset to Cambodia’s which was the main product that supported this agricul- tourism tural country, ii) increased amounts of foreign direct in- (iii) Garment industry leading export-oriented labor in- vestment to Cambodia’s labor-intensive industries such tensive industry as garment manufacturing, and the fact that it, more or (iv) High dependency on the external assistance pro- less, set Cambodia’s industrialization process on its way, vided by international aid agencies and iii) a constant inflow of external assistance provided (v) Rapid progress in terms of liberalization, deregu- by international aid agencies, which has been contribut- lation and globalization of the economy ing to the economy both directly and indirectly. Cam- The most peculiar aspect of Cambodia’s economic bodia, nevertheless, is listed among the least developed structure is the existence of a two-tier system in which countries, with its GDP per capita still under US$300, both the traditional ways of industry, led by the indig- which is far below the level of fast-developing fellow enous people, and the modern ways of industry, led ASEAN countries. mostly by overseas Chinese, function hand in hand. As for the more recent state of Cambodia’s economy, Cambodia is blessed with its most outstanding historical it slowed in 1997 and 1998 when the GDP growth rates resources, namely the Angkor temple complex, as well touched bottom, at 1.0%. The cause of this economic as its agricultural products that have comparative advan- slowdown can be attributed to i) political unrest within tages. As for the latter, garment manufacturing, being the Kingdom, ii) temporary suspension of external assis- an export oriented labor-intensive industry, became a tance due to the political instability, and iii) the impact leading industry. International aid agencies, in addition, of the Asian Financial Crisis. Cambodia, nevertheless, had great impact on Cambodia’s economy, not only by resumed its economic growth in 1999 at 4% and was implementing assistance programs but also by taking up projected to reach 5.5% in 2000. Inflation has been residence in the country. Staffs and families of these brought down and the national currency enjoys a rela- agencies, in fact, contribute greatly to the increasing tively stable exchange rate with the US dollar (see table demand for Cambodia’s everyday commodities. These 2-1). international aid agencies, as well, supervised Cambodia’s transition to a market economy, as a result 1-3 The features of Cambodia’s economy of which Cambodia made great progress in liberaliza- tion, deregulation and globalization of its economy. Cambodia’s economy used to center around such in- dustries as traditional farming, timber processing, and 1-4 Dependence on foreign capital inflows handicrafts. Present day Cambodia, in contrast, has come to be known as an economy of its own structures, The Royal Government of Cambodia, like govern- 46 Part II Chapter 1 Section 2. Economy Table 2-2 National Savings and Investments Table 2-3 International Assistance (percentage ratio to GDP) (officially announced) (Unit: %) (Unit: billions of riels) 1996 1997 1998 1999 1995 1996 1997 1998 National Investments 13.5 13.0 12.9 15.8 Budgetary support 81.8 150.0 95.9 0.8 Public sector 5.9 4.8 5.7 6.2 Grants 42.1 50.0 46.2 0.8 Private sector 7.6 8.2 7.3 9.6 Credits 39.7 100.0 49.7 0.0 National Savings 7.4 11.7 11.6 11.7 Project assistance 450.7 467.0 350.8 234.8 Public sector -1.2 0.7 -0.3 1.8 Grants 345.7 406.7 244.6 71.9 Private sector 8.7 11.0 11.9 9.9 Credits 105.0 160.3 106.2 162.9 Source: IMF (2000) Source: IMF (1999) Figure 2-1 Cambodia’s Industrial Structure Primary sector Secondary sector Tertiary sector (43%) (17%) (40%) Rice Livestock Other Manufacturing Other Commerce Other (12%) (12%) (19%) (7%) (10%) (13%) (27%) Source: Ministry of Economy and Finance (1999) ments of other developing countries, needs to solve the Cambodia, similar to most other developing countries, large gap in capital resources, in which Cambodia’s to- depends on external assistance in the form of budgetary tal amount of investments and public expenditures over- support and direct project assistance in order to finance rides that of the private savings and tax revenues (see these deficits-through international aid agencies and bi- table 2-2).